Operations Management (2) Topic 2 Prof. Upendra Kachru Aggregate Planning.

OperationsManagement (2)

Topic 2

Prof. Upendra Kachru

Aggregate Planning

Operations ManagementProf. Upendra KachruProf. Upendra Kachru

Planning Hierarchy

Level Customer Business Activity

Strategic Corporate/Senior OM Executives

Competitive StrategyProduct InnovationSupply Chain StructuringCapital Budget Process

Functional Regional/Plant Level Marketing StrategyPlant Utilization StrategyCapacity BudgetingAggregate PlanningOrganizational Control

Operational Operations Level CRM ProcurementLogisticsMPS and MRPManaging Workforce


Planning Hierarchy

Time horizon in years

Current Plans

Aggregate Plans

Strategies & Facilities

Types of Decision

Short term

Long term

Planning

Medium term


The aggregate plan links strategic goals and objectives of the organization with the plans for individual products , services and their various components.

WHAT IS AGRREGATE

PLANNING?


It determines the course the organization takes in the medium term, with the following in mind:

Market Inputs (demand forecasts and/or actual orders);

Capability Specifications and Performance Metrics; and

Resource Availability

Aggregate Planning has to firstly link strategic goals and objectives with the plans for individual products by transforming its understanding of the market into a set of capability specifications. i.e. what business processes must do to meet the needs and expectations of customers.

Nature of Aggregate Planning


The business processes that are involved are as follows:


Maximize Maximize profitsprofits customer servicecustomer service utilization of plant and utilization of plant and

equipmentequipment

Minimize Minimize inventory investmentinventory investment changes in production rateschanges in production rates changes in workforce levelschanges in workforce levels

Objectives of Aggregate

Planning


The Aggregate Planning Process

Aggregate planMaterials

Supplier capabilitiesStorage capability

Materials availability

EngineeringNew Products

Product design changesMachine standards

Human ResourcesLabor-market conditions

Training capacity

Accounting and FinanceCost data

Financial condition of firm

OperationsCurrent machine capacitiesPlans for future capacities

Workforce capacitiesCurrent staffing level

Distribution and marketingCustomers needsDemand forecasts

Competition behavior


Aggregate Planning System - Inputs

Planning for

production

External capacity

Competitors’ behavior

Raw material availability

Market demand

Economic conditions

Currentphysical capacity

Current workforce

Inventory levels

Activities required for production

External to firm

Internal to firm


Business Environment

Market Orientation Time Focused Environment Product Flexibility Focused Environment


Make-To-Stock (MTS): Produce to buildup inventory and then use that inventory later to meet demand. This makes the aggregate plan critical to the business.

Make-To-Order (MTO): Service organizations and job shops provide such Products.

Assemble-to-Order (ATO), Engineer-to-Order (ETO): Aggregate planning has to use actual or projected orders to plan production activities.

Market Orientation


Right inventory stocking decisions

Efficient, timely feedback

Excellence in collecting and analyzing data

Sufficient resources Sufficient resources at the right location

Time Focused Environment


Sufficient Goods at convenient place

Good Forecast Short change over times

Reduction in manufacturing lead time

Product Flexibility Focused

Environment

Operations ManagementProf. Upendra KachruProf. Upendra Kachru 14

Aggregate Demand and Aggregate Capacity

0

2000

4000

6000

8000

10000

Jan Feb Mar Apr May Jun

45005500

7000

10000

8000

6000

0

2000

4000

6000

8000

10000


4500 4000

90008000

4000

6000

Suppose the figure to the right represents forecast demand in units

Suppose the figure to the right represents forecast demand in units

Now suppose this lower figure represents the aggregate capacity of the company to meet demand

Now suppose this lower figure represents the aggregate capacity of the company to meet demand

What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up

What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up


A Chase Strategy is a strategy aimed at adjusting capacity in anticipation of demand.

You are "chasing demand" by regulating capacity to the demand doing it as dynamically and quickly as you can. Chase

Strategy


Using part-time employees Varying production rates

through overtime or idle time Maximizing efficiency

through training, work scheduling, cross-training, use of technology, etc.

Increasing involvement of consumer in delivery of service

Keeping Bottleneck Resources Busy

Sharing capacity with other divisions/firms

Outsourcing

Chase Strategy


Level Strategy

Level Strategy is a strategy where you maintain a constant capacity over a period of time, irrespective of fluctuations in demand.

This strategy is used when skill level, the training required, or the cost of hiring people and terminating them is high.


Changing Product Mix Increasing Machine

Product Rate Improving Quality Increasing Product Yield Increasing Motivation Increasing Employee

Involvement Changing Inventory Levels Planning for future

expansionLevel Strategy


Mixed StrategyIn a “mixed” strategy, the organization combines strategies, in view of its specific and unique requirements.

Mixed Strategy


OPTION ADVANTAGES DISADVANTAGES COMMENTS

Changing inventory level

Changes in human resources are gradual or none; no abrupt production changes.

Inventory holding costs. Shortages, resulting in lost sales, may occur if demand increases.

This applies mainly to production, not service, settings.

Varying work-force size by hiring or layoffs

Avoids the costs of other alternatives

Hiring, layoff, and training costs may be significant

Used where many unskilled people seek extra income.

Varying production rates through over time or idle time

Matches seasonal fluctuations without Hiring / training costs

Overtime premiums; tired workers; may Not meet demand.

Allows flexibility within the Aggregate plan.

SubcontractingPermits flexibility and smoothing of the firm's output.

Loss of quality control; reduced profits; loss of future business.

Applies mainly in production settings.

Impact of Different Options


OPTION ADVANTAGES DISADVANTAGES COMMENTS

Using part-time workers

Is less costly and more flexible than full-time workers.

High turnover / training costs; quality suffers; scheduling difficult.

Good for unskilled jobs in areas with large temporary labor pools.

Influencing demand.

Tries to use excess capacity. Discounts draw new customers.

Uncertainty in demand. Hard to exactly match demand to supply.

Creates marketing ideas. Overbooking used in some businesses.

Back-ordering.May avoid overtime. Keeps capacity constant.

Customer must be willing to wait, but goodwill is lost.

Many companies backlog.

Counter seasonal product and service mixing.

Fully utilizes resources; allows stable work force.

May require skills or equipment outside firm's areas of expertise.

Risky finding products or services with opposite demand patterns.


Graphical and charting procedure.

Linear programming. Mathematical modeling

using Linear Decision Rules Management Coefficient

Models Production Switching

Heuristics Simulation

Methods for Aggregate Planning


This is a trial-and-error method, assisted by spreadsheets. In general, the graphical and charting method follows five steps:

Determine the demand in each period.

Determine what the capacity is for regular time, overtime, and subcontracting each period.

Find the labor costs, hiring and layoff costs, and inventory holding costs.

Consider company policy that may apply to the workers or to stock levels.

Develop alternative plans and examine their total costs.

Graphical &Charting Method


Graphical &Charting Method

The method requires the planner to specify a planning horizon and secure aggregate demand forecastsSecond, the decision variable such as size of workforce, output rate, overtime or idle time, inventory level, sub-contracting, etc., have to be explicitly identified.Third, all models require the relevant costs, including costs of wages, hiring/layoff, overtime, inventory, etc., to be specified

Operations ManagementProf. Upendra KachruProf. Upendra Kachru 25

Chase and Level Strategy Costs

Production Cost Rs. 350/unitLost Sales Rs. 1000/unit per mo.Inventory Carrying Cost Rs. 10/unit per mo.Subcontracting Costs Rs. 600/unitLayoff costs Rs. 7000/workerHiring Cost Rs. 3500/workerBeginning Workforce Level 20 workersCapacity per Worker 50 units/mo.Beginning inventory 700 unitsClosing Inventory 100 units

Suppose we have the following unit demand and cost information:

Suppose we have the following unit demand and cost information:

Demand/mo Jan Feb Mar Apr May Jun

1000 1200 1500 1900 1800 1600


Demand Jan Feb Mar Apr May Jun

Production/mo 1000 1200 1500 1900 1800 1600

Inventory 700 700 700 700 700 700

Hire/Fire 0 +4 +6 +8 -2 -4

Given is the demand information below: Given is the demand information below:


Production 350 420 525 665 630 560

Inventory 7 7 7 7 7 7

Hire/Fire 0 14 21 28 14 28

Total 357 798 1351 2051 2702 3297

1000x350=Rs. 350000

700x10

7000x2= 14000

Cumulative cost information is given in ‘000 below:


50x(20+4+6)=1500

Chase Strategy


Demand Jan Feb Mar Apr May Jun

Production/mo 1400 1400 1400 1400 1400 1400

Inventory 1100 1300 1200 700 300 100

Hire/Fire 0 0 0 0 0 -0

Given is the demand information below: Given is the demand information below:


Production 490 980 1470 1960 2450 2940

Inventory 11 13 12 7 3 47

Hire/Fire 0 0 0 0 0 0

Total 529 1032 1534 2031 2524 3015

Chase Strategy costs Rs.3,297,000

1100x10



1300+1400-1500=1200

Level Strategy


Problem: Ramson & Co.

Month Expected demand

Production days Demand per day

January 1000 22 45

Feb 800 18 44

March 1200 21 57

April 1200 21 57

May 1500 22 68

June 1100 20 55

Ramson & Company, a Delhi company, manufactures designer furniture for offices. Mr. Ram has developed monthly forecasts for executive chairs and presented the period January – June in the table below.


Inventory carrying cost Rs. 10 unit/month

Subcontracting cost(marginal cost per unit above in-house manufacturing cost)

Rs. 100/unit

Average pay rate Rs. 20/hour (Rs. 160/day)

Overtime pay rate Rs. 40/hour (above 8 hours)

Labor-hours to produce a unit 6 hours/unit

Cost of increasing production rate (hiring) Rs. 100/unit

Cost of decreasing production rate (layoffs) Rs. 150/unit

Cost Information for Manufacture of Executive Chairs

Cost Information for Manufacture of Executive Chairs


Forecast vs. DemandForecast vs. Demand

6800/124 = 54.838


Plan 1: Level Strategy - Production is equal to Average Demand

Plan 1: Level Strategy - Production is equal to Average Demand

MonthProduction at 55

units/dayDemand forecast Ending inventory

January 1,210 1000 210

February 990 800 400

March 1,155 1200 355

April 1,155 1,200 310

May 1,210 1,500 20

June 1,100 1,100 20

Total 6,820 6800 1,315

COSTS CALCULATIONS

Inventory carrying Rs. 13,150 = 1,315 units carried x Rs. 10 / unit

Regular time labor Rs. 833,280 = 42 workers x Rs. 160 / day x 124 days

Other costs 0

Total cost Rs. 846,430


Plan 2: Mixed Strategy- Constant Workforce at lowest demand level and meet additional demand through Outsourcing

Plan 2: Mixed Strategy- Constant Workforce at lowest demand level and meet additional demand through OutsourcingTo produce 44 units/day in-house, 33 workers are needed.

All other demand is met by subcontracting, which is thus required in every month. No inventory costs are incurred.

In-house production = 44 units/day x 124 production days = 5,456 units

Subcontract units = 6,800 - 5,456 = 1,344 units

COSTS CALCULATIONS

Regular-time labor

Rs. 654,720 = 33 workers x Rs. 160 per day x 124 days

Subcontracting Rs. 134,400 = 1,344 units x Rs. 100 per unit

Total cost Rs. 789,120


Plan 3: Chase Strategy – Hire and layoff workers to meet the exact demand each month.

Plan 3: Chase Strategy – Hire and layoff workers to meet the exact demand each month.

MonthForecast (units)

Prod Rate

Production Cost)

Hiring cost Layoff cost Total Cost

Jan 1000 45 Rs. 118,800 Rs. 118,800

Feb 800 44 Rs. 95,040 Rs. 2,700 Rs. 97,740

Mar 1200 57 Rs. 143,640 Rs. 170,940

Apr 1,200 57 Rs. 143,640 Rs. 27,300 Rs. 143,640

May 1,500 68 Rs. 179,520 Rs. 24,200 Rs. 203,720

June 1,100 55 Rs. 139,200 Rs. 3,900 Rs. 143,100

6800 Rs. 819,840 Rs. 51,500 Rs. 6,600 Rs. 877,940

44 x 6 x Rs.20 x 18 = Rs. 95,040

Rs. 150 x 13 x 20 = Rs. 3,900

Rs. 100 x 13 x 21= Rs. 27,300


Comparison of Different Plans Comparison of Different Plans

Cost Plan 1 Plan 2 Plan 3

Inventory carrying Rs. 13,150 0 0

Regular labor Rs. 833,280 Rs. 654,720 Rs. 819,840

Overtime labor 0 0 0

Hiring 0 0 Rs. 51,500

Layoffs 0 0 Rs. 6,600

Subcontracting 0 Rs. 134,400 0

Total cost Rs. 846,430 Rs. 789,120 Rs. 877,940

Plan 2 is the lowest cost option


In large companies with several divisions or plants, HPP is used so decide which product groups to produce where.

Planning is then carried out at the appropriate organizational level.

HPP is the starting point for decisions about production quantities, inventory levels, and workforce levels for each plant.

This planning process can continue plans for individual products being developed by departmental managers.

Hierarchical Production Planning (HPP)


The typical service operation is Make-To-Order rather than Make-To-Stock.

The aggregate planning process, therefore, is different for services in the following ways:

Most services can not be inventoried.

Demand for services is difficult to predict.

Capacity is also difficult to predict. Service capacity must be provided

at the appropriate place and time. Labor is usually the most

constraining resource for service.

Aggregate Planning For Services


Proactive Strategies

• Fixed Service Schedules/Variable Hours Strategy

• Appointment for Service Times

• Customer Involvement• Planning with order

Backlogs• Differential Pricing• Develop Complementary

Products or Services to address imbalance

• Coordination with other Organizations

Operations Management

Scheduling Customer DemandBacklogs: For example, your tailor

shop will not tell you exactly when service will commence. You give your measurements (service request) to a tailor (order taker), who adds it to the waiting line of orders already in the system and he gives you a date for trying out the outfit.

Prof. Upendra KachruProf. Upendra Kachru


Reservations:

In many industries like in the hospitality and travel trades, reservations have become a norm. Reservations systems, although quite similar to appointment systems, are used when the customer actually occupies or use facilities associated with the service.



Cont. Appointments:

An appointment system assign specific times for service to customers. The advantages of this method are:

Timely customer service High utilization of servers

Hospitals are examples of service providers that use appointment systems



Aggregate Planning For Services

Where this is not the case, service organizations also use aggregate planning, some in exactly the same way with a manufacturing firm.

Aggregate planning in the case of a high-volume-product output business is very similar to manufacturing.

In such high-volume tangible services, traditional aggregate planning methods may be applied.


In a restaurant, for example, inventory is perishable.

In addition, in fast-food restaurants, peak and slack periods may be measured in hours.

The ’product’ may be inventoried for only as long as 10 minutes.

This brings in complexity in aggregate planning.


Aggregate Planning for Services

Most service organizations have limited capacity. Their product is perishable e.g. airlines, and hotels, etc.In yield management, pricing relates to addressing specific capacity problems. The objective is to sell as much of the service at full price as possible, but to offer discounts if necessary to avoid the service to elapse.

Yield Management


From an operational perspective, yield management is most effective when

Demand can be segmented by customer.

Fixed costs are high and variable costs are low.

Inventory is perishable. Product can be sold in advance. Demand is highly variable.

Yield Management


Yield Management Formula

Where:n = number of no-shows

x = number of rooms or seats overbooked

Cu = cost of under-booking; i.e., lost sale

Co = cost of overbooking; i.e., replacement cost

P = probability

The probability of ‘no-shows’ is given by the formula:

P(n < x) Cu/ ( Cu + Co)

In yield management, service providers seek to minimize the cost of overbooking.


Problem – Great Eastern Hotel

The Great Eastern Hotel at Jaipur had on the basis of historical data calculated the probability of ‘no-shows’ in a particular season.

The cost of under booking was estimated at Rs. 1750; and the cost of overbooking at Rs. 1200.

The statistical data is shown below:No-Shows Probability P(N < X)

0 .15 0.001 .25 0.152 .30 0.403 .30 0.70


Solution

Expected number of no shows = 1.75

Optimal probability of no-shows = 0.593

As you expect 1.75 ‘no shows’ and rooms have to be integer numbers, you overbook 2 rooms. The cost of overbooking the rooms is as follows:

Cost of Refusing Rooms = Rs. 660.00

Lost revenue from no-shows = Rs. 525.00

Total cost of overbooking by 2 rooms = Rs. 1185.00

Expected savings = Rs. 1877.50 a night

Therefore, it is worth overbooking 2 rooms to maximize profits and capacity utilization.

0*(.15) + 1*(.25) + 2*(.30) + 3*(.30) = 1.75

[2(.15) + 1(.25)]*Rs. 1200 = Rs. 660.00

[(Rs. 1750* 1.75) - Rs. 1185.00] = Rs. 1877.50

1750 / (1750 + 1200) = 0.593

(.30)* Rs. 1750 = Rs. 525


& Solution The hotel sells its first 30 rooms at Rs. 2000.00 and the next 30 rooms at Rs. 4200.00.

The variable cost per room is Rs. 1500.00.

By selling rooms at differential prices, the hotel expects to improve its operations.

Does it do so?

Graphical Problem


Solution The result is that it sells an additional 30 per cent of its rooms and improves profitability to Rs. 96,000 per day.


In the real world, a manufacturing system with only a fair degree of complexity might process components through seven or eight manufacturing stages.

The process would probably be integrated with parts purchased from outside vendors.

The final-assembly plan would combine numerous internally manufactured components, purchased components, and subassemblies into end products for the customers.

Desegregating the Aggregate Plan


The operations manager would like to know:

How should aggregate output be subdivided among each of the products that are to be produced?

What mix of these products should comprise the aggregate inventories?

This process of translating aggregate plans into plans for individual products is called desegregation.

Desegregating the Aggregate Plan


Rough-cut Capacity Plan

The upper portion of shows that the aggregate production plan anticipates making 1,200, 800, and 600 2-liter bottles of soda over the 3-month planning horizon. The production schedule shown in the bottom half of the figure above provides a week-by-week schedule.


The rough-cut capacity plan is necessary to generate the necessary detail, for planners to transform them into the Master Production Schedule (MPS).

Planners use this to determine the firm’s resource needs over the planning horizon.

In our next session, we will discuss MPS and MRP.

Rough-cut Capacity Plan


Forecast control What is Inventory

management?

This is given as an Appendix to the Chapter on Supply Chain Management in your text book.

Read at Home

OperationsManagement (2)

Click to edit company slogan .

Operations Management (2) Topic 2 Prof. Upendra Kachru Aggregate Planning.

Documents

Transcript of Operations Management (2) Topic 2 Prof. Upendra Kachru Aggregate Planning.